Why You Should Set-up Your Company’s Business Credit Before You Need It
Despite major advances in business lending, establishing business credit is becoming more complex in the global economy. The notion of a “business credit rating” to evaluate lending risk is not as evolved or uniform as the system for personal credit. Personal credit has become more consistent and generally accepted due to score rating systems like a FICO score. According to Fico.com, 90% of the top US lending institutions use a FICO score to make lending decisions for consumers.
The challenging retail environment, competition from online retail giants and the supply chain uncertainty have become a major concerns for many US companies. It’s also a growing reason that many companies are seeking business loans in 2022. Capital funding for the purposes of ensuring an adequate and timely supply of goods is exploding according to iCapitalFunding CFO, Robert Kleiber. iCapitalFunding provides capital for small-to-medium-sized businesses.
“We are seeing a surge in companies seeking to finance larger purchases of raw materials and supplies due to the disruptions in the global supply chain,” says Kleiber.
Denver-based Felene Inc, a maker of distilled spirits is a prime example of the need for manufacturers like distilleries to increase purchases of raw materials and packaging supplies.
“We are seeing a severe shortage in glass bottle availability,” says Felene President, Kim Laderer. What we used to purchase on a two-to-three-week lead time is now taking eight-to-ten weeks minimum”, added Laderer.
Laderer’s company manufactures sugarcane vodka in Denver Colorado and says that in addition to shortages, there is also the associated rise in cost due to scarcity. She says that her distillery peers are almost all saying the same thing. “As an industry we are facing a very critical time in the year when we do almost 450% of our annual business. At this point many distilleries would be expecting bulk shipments of glass bottles to take them through the holiday season. If you did not order in bulk two months ago you may find yourself without glass bottles for the final three months of the year,” says Laderer.
Learn About Your Funding Options
Some producers such as Felene say they are relying on a mix of business financing options to fund larger purchases much further in advance than they would ordinarily do. Laderer says her company is not taking any chances with a further disruption in supply chain stability.
“We were aware of the magnitude of the risks to the supply-chain earlier in the year”, says Laderer. “The first thing we did was to consolidate our purchases and tightened discretionary spending so we’d have enough capital to make lager purchases and get prepared to sit on that material in stock for longer than we would ordinarily hold inventory. We also, secured lines of credit in advance as well as other sources of business financing.”
Sources of Business Credit
A traditional bank loan is out of reach for many small businesses, especially startups since lenders have tightened qualifying requirements. So for many new businesses and early-stage companies, they will need to look elsewhere to raise capital. This is where understanding what types of small business loans fit your company’s business needs can pay-off. Doing some due diligence on your business idea could save thousands of dollars in finance costs.
Banks and Traditional Financial Institutions
Small business owners with good credit, a solid credit history and a high credit score should try to get a loan from a bank or other traditional financial institution because these lenders will likely provide the lowest cost of capital, because you will likely find they will offer the lowest interest rates and repayment terms and lower monthly payments on borrowed funds.
You will need to go through a rigorous and formal loan application process with these lenders, but it’s usually the best source of financing. Keep in mind that banks are also the primary source of Small Business Administration (SBA) loans. SBA loans are the holy grail of loans so if you qualify, take that path.
For working capital loans a borrower will need to provide a business plan, furnish tax returns and show balance sheet reports for several years.
Equipment Leasing
Many manufacturers will offer financing or leasing terms (usually through a financing company) to help acquiring needed equipment. The providers of the financing will usually use the equipment as collateral. Equipment leasing has a lower threshold of qualifying than a traditional business loan. In addition, the company can upgrade their equipment in the short term as their business grows. Leasing offered the upgrade capability that purchasing did not.
Instead of paying cash for distillery equipment Laderer says the company looked to equipment leasing to keep the cash reserves liquid. “This is a global battle with a lot of customers fighting for limited resources. It’s pretty simple, someone is going to be left-out without the ability to bottle, it’s just simple math,” says Laderer.
The company says they prepared like they were going to battle. They limited discretionary spending and allocated cash reserves to purchasing raw materials and packaging supplies in bulk. In addition, they established relationships with funding providers and mapped-out a financing strategy that would allow them to make large purchases of goods that were becoming increasingly difficult to source.
“For Felene, we were hoarding cash and establishing credit lines to buy effectively. It’s kind of similar to buying an insurance policy,” explained Laderer.
So for large equipment purchases, the company opted to lease versus buying. This cut monthly “cost of ownership” and freed-up free cash flow.
“It made perfect sense for us to re-direct free cash-flow to non-capex purchases. We know we will use the materials and our “insurance premium” is the time value of the additional purchase price. Considering the alternative, that was a very small price to pay and an easy decision”.
In addition, the company is building its business credit through their lease programs.
Credit Cards and Business Lines of Credit
But Laderer and Felene also took an additional “insurance policy” to protect against supply-chain risk. They actually establish a relationship with a funding source to set up business finance options if needed in the future.
Startup businesses will generally rely on a strategy of bootstrapping operational costs – or put plainly-minimize expenses. This may mean doing things manually as opposed to buying automation equipment. Bootstrapping also means occasionally used personal funds for business expenses. This includes making business purchases on credit cards in the short term.
While credit cards usually carry high interest rates, they are a lot easier to acquire than traditional loans. Over time, it may be possible to get a small credit line on a credit card from the bank where you do business. This will also help you establish credit in the future.
Similarly, talk to your banker about a small business line of credit. This is one advantage of having a relationship with a small bank. Start small, pay-off your balances over time and grow your credit profile.
Selling Stock and Equity Financing
As an alternative to borrowing, small business owners may consider selling shares in their company to investors. This can be a complex process and may require consulting a securities attorney and your accountant.
There are many ways to raise capital from investors. We’ll address a few more popular strategies here.
- Venture Capital companies are professional investment companies that look for new businesses to invest in. In addition to providing an infusion of cash, you should consider what other resources they can provide. This may include management advice, access to markets and companies they also invest in. But be advised, venture capitalists are pros and will likely look to acquire a large share of your company.
- Angel Investors are generally private individuals (friends and family) that will provide business owners with start-up capital in exchange for a percentage of ownership in your company.
- Crowdfunding is a way to raise small amounts of cash from many people. This has become a popular activity online. If you have a catchy idea it may be a novelty for people to spend a few hundred dollars.
These funding options a just a few alternatives to raise capital for your small business. The best advice is to take a longer-term view and be financially responsible.
“The best time to arrange for funding is when you don’t need it desperately,” said Laderer. Our business has been growing steadily and we are profitable. But like any business, we will need growth capital to get to the next step. By starting a relationship with our capital providers as a normal course of business, we know have a lot more financing options.”
Mr. Kelly is an expert in online marketing, search engine optimization, content development and content distribution. He has consulted some of the top brokerages, media companies and financial exchanges on online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.
He continues to be a regular market analyst and writer for forextv.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA). Tim is also an expert and specialist in Ichimoku technical analysis. He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.
In addition to writing about the financial markets, Mr. Kelly writes extensively about online marketing and content marketing.
Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.
Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.
Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine with an initial circulation of over 7 million copies monthly.
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